Mortgage Rates Are Rising at Their Fastest Rate in Over a Decade

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If rates continue to climb, it could really force a lot of would-be buyers to change their plans.

Key points

  • After many months of record-low rates, the cost of financing a home has soared this year.
  • Mortgage rates haven't risen this quickly since February 2011.

When mortgage rates started dropping substantially in mid-2020, many buyers rushed to purchase a home to capitalize on record-low financing. But those low mortgage rates held steady throughout 2021, so much so that buyers began to get used to them.

The events of the past 12 weeks have served as a rude awakening for buyers who were hoping for a few more months of ultra-low mortgage rates. Since the start of the year, rates have been on an upward swing. In the past month, rates have risen sharply, to the point where the average 30-year loan isn't far off from 5% and the average 15-year loan is inching closer to 4%.

Historically speaking, today's rates aren't nearly as high as they've been in past spikes. At the same time, mortgage rates also haven't risen at such a rapid pace since February 2011, according to the Mortgage Bankers Association.

Making matters worse, home prices are sitting at inflated levels right now, due largely to record-low inventory levels. As such, buyers today face a tough market -- and may have no choice but to put their homeownership plans on hold.

Affordability issues could drive home prices downward

The fact that home prices are up isn't new. Buyers have grappled with sky-high home prices since the latter part of 2020.

The difference, though, is that from mid-2020 through the end of 2021, mortgage rates were low enough to help offset higher home prices. Now, that's no longer the case. So buyers may be forced to reassess their purchasing plans -- and perhaps put them on pause.

That wouldn't necessarily be a bad thing, though. If enough buyers pull out of the market, it could ease the pressure on supply and cause a decline in home prices. Clearly, that would give sellers less of an upper hand. But it also might serve the very important purpose of bringing home values back down to a reasonable level.

Should sellers worry about a housing market crash?

So far, rising mortgage rates don't seem to be deterring buyers too much. But if rates keep climbing, that could change.

Sellers shouldn't lose sleep worrying that the residential real estate market is about to crash. But should they expect home prices to drop in the course of the year? Yes. So those looking to sell a home may want to get their listings ready sooner rather than later.

What’s more, existing homeowners hoping to tap their equity may want to get the ball rolling rather than wait. Once home values drop, equity levels will end up following suit. That could make it harder to secure financing options like home equity loans or lines of credit. It could also make it more difficult to qualify for a cash-out refinance -- an option many homeowners have taken advantage of to capitalize on higher levels of equity.

All told, the extent to which home prices shift this year will hinge heavily on buyer demand. But if mortgage rates keep climbing as they're expected to, we could see a pretty notable pullback.

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